CHENNAI: After 26-years of debate over its potential merit and shortcomings, India is scheduled to combine more than a dozen levies into ‘one nation, one tax’ on July 1. The concept of GST is not new to the world as nearly 160 countries as on 2016 have opted this mode for bringing disparate individual taxes into a single tax.
France was the first country to introduce a unified tax regime in 1954, while Canada and Brazil are the only countries which have a dual GST model, where revenue will be divided between states and the Centre. India, too, has chosen the Canadian model of dual GST. A single uified tax system is a global fiscal trend. China implemented GST in 1994 while Russia did it in 1991. Saudi Arabia plans to do it in 2018.
The one big difference between GST in India and similar taxes in other countries is that, in India, two types of GST is charged — dual GST. Another is that the tax is payable at the final point of consumption.
India does not follow an ideal Value Added Tax (VAT) system. The input tax credit paid at each stage is available in the subsequent stage which makes GST a tax only on “value addition” at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain However, in most countries VAT is taken as a substitute for GST. Currently, countries like Canada, New Zealand, Australia, Singapore, Jersey (UK), Malaysia, Indonesia and Pakistan have a GST system while remaining follow a VAT system.
“The GST model across the commonwealth countries are similar with some variations. Unlike India, other countries have a much higher threshold for GST applicability thus
reducing the burden for small businesses. This will bring in challenges for our SMEs,” pointed out Archit Gupta, founder and chief executive of ClearTax.
Unlike other nations, goods and services in India will be charged at different rates depending on the categories they belong to. Also, while other countries have rates in the range of 15-20 per cent, India’s rate is lower and ranges between 5-28 per cent.
Going farther afield, in Australia, GST is a federal tax which is collected by the supreme authority and later divided among the states.
Meanwhile, while India is yet to see its share of development around implementation of GST, one should be wary of lessons learnt in other countries that have overhauled their indirect tax systems. “In many countries, GST was introduced at a lower rate than pre-existing tax rate. Despite that, the GST pushed up inflation for one year in all the five countries in our study (Australia, Canada, Japan, Malaysia and Singapore), after which inflation moderated. In some countries, the pass-through of higher tax costs by firms occurred with a lag, as firms took time to fully assess the cost implications of the new tax structure,” Nomura said in a recent report.